Equity Reading 43 - Contradiction - WHY DOESN'T THIS WORK IN BOTH PROBLEMS

EOC in CFAI #7 and #11 FCFE= NI - (1-DR)(FCInv-Dep)-(1-DR)(WCInv) Enough information is given in BOTH #7 and #11 to solve using this equation however in #7 they also give you enough information to use: FCFE = NI + Dep -WCInv - FCInv + net borrowing but the two equations don’t give you the same answer for #7. You have to use the debt ratio for #11. Can anyone answer why this contradiction takes place? It explicitly tells you in #7 that: NI - 250mm Dep - 90mm Capex - 170mm (they use this as FCInv in the other formula so no sales of assets) WCInv - 40mm Phaneuf finances 40% of the increases in WCInv and Capex with debt You get 226 when you use the debt ratio formula but the answer uses the other formula I have listed above and you get 178mm. WHY??? #11 you have to use the DR formula and they give you all of the info in the same language.

In #7 you are specifically given that debt = 40% of capex and not capex-dep.

AMCC Wrote: ------------------------------------------------------- > In #7 you are specifically given that debt = 40% > of capex and not capex-dep. Actually one of the bullet points says word for word: “Phaneuf will finance 40 percent of the increase in net fixed assets (capital expenditures less depreciation) and 40 percent of the increase in working capital with debt financing.” Any other guesses?

Both formulae give the same result: FCFE= NI - (1-DR)(FCInv-Dep)-(1-DR)(WCInv) = 250 - (1-0.4) (170-90) - 40(1-.4) = 178 FCFE = NI + Dep -WCInv - FCInv + net borrowing = 250 +90-40-170+X = 178 X = net borrowings = 0.4(170-90) + 0.4(40) = 48

AMCC Wrote: ------------------------------------------------------- > Both formulae give the same result: > > FCFE= NI - (1-DR)(FCInv-Dep)-(1-DR)(WCInv) = 250 - > (1-0.4) (170-90) - 40(1-.4) = 178 > FCFE = NI + Dep -WCInv - FCInv + net borrowing = > 250 +90-40-170+X = 178 > > X = net borrowings = 0.4(170-90) + 0.4(40) = 48 I’m an idiot -

Thanks for asking this question!! Was running into exactly the same problem for eoc #7.